investment viewpoints
Outlook 2021 – Asian Equities
We remain very constructive on Asian Equities into 2021. This year’s outperformance by Asian Equities versus Developed and other Emerging markets was supported by the swift recovery and normalization of Asia’s economy, particularly in North Asia. Although the economy in several South-East Asian countries will rebound sharply in 2021, we expect our portfolios to remain strongly exposed to North Asia, namely China, South Korea and Taiwan.
In China, the Five-Year Plan centers on productivity and domestic demand, while the 2035 vision emphasizes technological self-sufficiency. This will create numerous opportunities in consumer-facing segments and digital innovation. In South Korea and Taiwan, the home of unreplaceable tech leaders, technology will continue to drive the economy, as the pandemic has accelerated worldwide data consumption, online demand, digital innovation, and transition to cloud. Longer term, in China, authorities’ focus on sustainability aspects, recently illustrated by the decision to cut emissions per unit of GDP by “at least” 65% (previously “up to”) by 2030 compared with 2005, or research into a system to measure the social creditworthiness of companies, are also likely to trigger new business developments. At the very least, such efforts will create incentive for companies to improve their business practices.
Several market concerns on China (not all of them new) have been prominent in recent weeks. Firstly, concerns over US-China relations, specifically in the context of the delisting bill passed by the US Congress. We would argue that actual implementation of this will take time, and that many Chinese companies with ADRs have already procured or are in the process of procuring a Hong Kong listing. Secondly, the risk has been flagged of a 2021 removal by China of its fiscal stimulus, and/or credit tightening. We share the view that this is likely, but on a relative scale China’s macro stimulus in 2020 was much lighter than in Western countries, and its removal is likely to have a fairly marginal impact. Thirdly, several state-owned enterprise (SOE) debt defaults caused negative sentiment in November. It is true that 2020 has been a relatively heavy year in terms of SOE defaults. However, we note that in the last 5-6 years, Chinese authorities have allowed SOEs to fail on a controlled scale, and avoided triggering meaningful imbalances in the economy. These three concerns therefore require monitoring but do not threaten our constructive view on Asian Equities at present.
From a bottom-up perspective in Asian Equities, we perceive opportunities in numerous fields which come under two common themes : domestic, consumer-driven demand ; and continued digital innovation.
Our positive view on Chinese domestic consumption reflects the feedback and outlook received from companies in our universe during the Q3 reporting season and subsequent updates on October’s Golden Week and the 11/11 event. Trends have been strengthening sequentially, and premiumisation continues. The online channel has become even more entrenched in the habits of both consumers and merchants. Lower-tier cities continue to provide extra growth as penetration increases – and although this often requires investment, the negative impact of this on margins has been well-controlled by a number of companies with good execution and strong brands.
We perceive opportunities in numerous fields which come under two common themes : domestic, consumer-driven demand ; and continued digital innovation
We continue to see meaningful long term potential in the online segment in China, though in the near term we have grown more cautious, as authorities have clearly signaled their wish to contain any monopolistic behaviour, protect consumer interests, and avoid potential systemic risks arising from unchecked fintech innovation. Our vigilance arises from the 2018 precedent, when meaningful regulatory changes occurred in various consumer-facing sectors (online gaming, healthcare, P2P, after-school tutoring etc.) While these changes were sensible and positive for the longer term, they did at the time impact share price performance while visibility was low, which lasted between a few months (e.g. in the case of education) to almost a year (in the case of healthcare and online gaming).
Within technology, we expect solid DRAM prices from late Q1, driven by surging notebook demand due to continuing Work From Home even post-pandemic, and by continued restocking on the part of China and US smartphone makers, as well as demand from cloud providers. Cloud migration is clearly an innovative area with multi-year growth potential, and additional ways of getting exposure to it include datacenter operators (seeing strong market growth in China) and IT Services companies (namely in India). We also see various opportunities to gain access to Apple’s supply chain through well-managed companies in China.
India’s equity market has largely rebounded, as high frequency data has moved into positive yoy trends in the last 2-3 months (e.g. rail-freight, power demand, e-way bills, GST collections). The better-managed banks / financial institutions have also signaled receding asset quality concerns during the last quarterly update. Our preference goes to high quality stocks in financials, healthcare, consumer staples, consumer discretionary, and IT services, from which we expect no particular additional rebound, but a continuation of superior growth and execution.
Finally, we expect the vaccine roll-out to trigger an additional leg of profit recovery in several Asian travel and retail companies starting from mid-2021, namely in organized and ahead-of-the-curve countries like Singapore and China.
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